Marginal Gain – September 2019

As we come into our last month of our 6th trading year, we are projecting to have another record year in terms of turnover. In addition, during the first quarter of our seventh year, we should have some interesting announcements and developments to further improve our proposition.

The demand for advice has never been stronger as legislation continues to cause issues around pensions and Inheritance Tax. Investment markets continue to confound and create at once a benign growth pattern but with a latent uncertainty and volatility.

As we have said so often; a well-diversified portfolio and a handle on the major themes and planning issues is the key to achieving financial goals. With this in mind, we hope you find the following articles of use and prompt some consideration to discuss at our next meetings.

Peer to Peer Investments

Individuals will not be permitted to have more than 10 per cent of their assets in peer to peer investments unless they have taken financial advice, under new rules proposed by the Financial Conduct Authority (FCA).

The rules, released on the 4th June, are designed to prevent investors from taking what the regulator considers to be excessive risk.

The new rules came just days after Lendy, a peer to peer lending platform, went into administration with a high volume of non-performing loans on its platform.

Under the new rules, platforms will be required to assess a client’s knowledge and experience of peer to peer platforms, setting new minimums for the level of information platforms must disclose.

In particular, platforms will not be prevented from including information about specific investments in their marketing materials.

There will also be a more explicit requirement to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise, with a particular focus on credit risk assessment, risk management and fair valuation practices.

Christopher Woolard, Executive Director for Strategy and Competition at the FCA, said: “These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities.

“For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.

“The FCA has refined its proposals to ensure the new rules protect consumers and support the P2P market. In particular, additional guidance has been provided to make it clear that platforms will not be prevented from including information about specific investments in their marketing materials.”

Laura Suter, Analyst at AJ Bell, said: “Peer-to-peer platforms have been dealt a blow by the regulator today, as the FCA introduces new rules to tighten up the sector.

“From December, anyone wanting to invest in peer-to-peer will now have to pass a test to show they understand the risks they involve, and new investors will be limited to having 10 per cent of their assets in the sector.

“Providers will also be restricted in how they market products in the future, stopping mass advertising campaigns.

“The latest ISA season highlighted the flood of marketing from peer-to-peer lenders, some of which made comparisons with cash Isa rates or didn’t fully highlight the risks involved in the sector.”

Peer-to-peer platforms host the Innovative Finance ISA (IFISA), was launched in April 2016 to allow UK individuals to earn tax free income on peer to peer lending.

In April the FCA warned about risky IFISA’s being advertised alongside cash ISA’s. The regulator stated it had seen evidence the two products were being promoted together, and it warned investments held in IFISA’s were “high-risk”.

The City watchdog warned these types of investments might not be covered by the Financial Services Compensation Scheme and investors might therefore struggle to reclaim any money lost.

The FCA warned: “Anyone considering investing in an IFISA should carefully consider where their money is being invested before purchasing an IFISA.”

Jonathan HowardAuthor: Jonathan Howard
01908 487531 #6

Purchasing Commercial Property

Self-Invested Personal Pension Purchase

Buying commercial property inside a pension is something that has gone through phases of popularity and can certainly benefit the company and the individuals involved if the circumstances are appropriate.

The biggest advantage is that there is no liability to Capital Gains Tax. When you consider the performance of property as an investment over the last 50 years this is a massive benefit if you have made the acquisition at the right time.

There are some benefits that are the same as with all pensions. Such as the fact that the purchase is made from income that has not been taxed. In addition, the rental income means that the company is contributing to the pension without it being limited to or using up the annual allowance. The additional implication of this is that if the pension has borrowed to make the purchase then you are using untaxed rental income to repay the borrowing.

Furthermore, by having the property inside the pension, the shares in the company are not increased by the value of the property making disposal easier from a capital gains tax and inheritance tax point of view. The property is also generally protected against both personal and company creditors.

Another interesting benefit is that if you are planning to sell the business at some point in the future the property can be purchased by the new owner’s pension fund without the disposal incurring a CGT charge.

There are also some benefits that are similar to personal ownership. For example, the fact that rent can be set against corporation tax.

There are some new benefits associated with the new flexible pension rules. For example, the property may never have to be sold as the pension itself can be passed down through the generations.

As with the benefits, there are some difficulties that are similar to those with any asset in any pension and some that are specific to holding property.

Property is not normally a very liquid asset and so generating a regular income in retirement may be difficult as it will be dependent on rental income. This also has implications if company owners fall out and want to sell the property in a short period of time. Ideally owners would put in place an agreement prior to purchase to ensure that one owner cannot hold the others to ransom.

There can also be additional obstacles to raising finance through a pension compared to other purchase options. The pension may not have sufficient money available to make the purchase and cash contributions are limited to the pension annual allowance. Obviously, some carry forward of previous years’ allowances may be available. This shortfall can be made up through borrowing, but this is limited to 50% of the assets inside the pension whereas a company might be able to raise significantly more. In addition, you obviously cannot use the property as collateral for future loans to the company.

As an individual owner you would have the freedom to set the rent at whatever level you would like. However, if held in the pension you would need to pay a market rent to avoid unauthorised payment/scheme sanctions. In the event that you want to sell the property to a “connected party” the sale must be on “arm’s length terms”.

Over the last few months I have tried to cover at a high level the costs and benefits of different approaches. I hope that this gives an idea of the sort of issues that are relevant. The best outcome in a situation like this is when business owners work closely with financial planners, accountants and lawyers to draw on the widest range of experience and knowledge.

Author: Toby Nutley
01908 487531 #7

Where our Governments pension strategy is all wrong

The average single pensioner will have already spent their entire state pension for the year – despite four months of the year remaining, Just Group has warned.

The specialist retirement firm confirmed the 28 August as ‘state pension shortfall day’ for single pensioners where their average yearly spending will have exceeded the annual state pension they receive.

For couples, shortfall day will be this Saturday (31 August), assuming they receive the full weekly state pension amount and have average expenditure, according to Just.

Single pensioners face an average annual gap of £4,498, while couples must find an extra £8,710, according to the analysis.

This is because while the full state pension amounts to £8,767.20 a year, figures from the ONS showed average annual spending for a one-person retired household is higher at £13,265.20.

Conversely the Government’s rules capping the ability for people to invest in pensions to fund their own self-sufficiency continues to come under the spotlight.

HM Treasury will be reviewing the impact of the tapered annual allowance for public sector workers, after doctors have been campaigning to scrap it for months.

Introduced in 2016, the tapered annual allowance gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.

It emerged late last year that the number of members leaving the NHS Pension Scheme was five times higher than that seen by other public pension funds, most likely because of the taper.

Starting from the next financial year, the government wants to allow doctors to set their level of pension accruals themselves at the start of each year.

Under this rule change senior clinicians can set any percentage for contributions and accrual rate, in 10 per cent increments, depending on their financial situation.

Employers will then have the option to recycle their unused contribution back into the doctor’s salary, the government stated.

Recognising that around a third of NHS consultants and GP practice partners have earnings from the NHS that could potentially lead to them being affected by the tapered annual allowance, Treasury will look to “review how the tapered annual allowance supports the delivery of public services such as the NHS”.

Jonathan HowardAuthor: Jonathan Howard
01908 487531 #6

Do you know how marriage could affect your Will?

Many people are completely unaware of how marriage or divorce could impact their Will. Marriage and Civil Partnership is a significant event for everyone, and it is vital that you take into account all of the legal implications it carries with it. It is not only important for married couples to create a Will but also hugely important for unmarried couples to create one too.

Making a Will in contemplation of Marriage

Making a Will if you are not married or before you get married is especially important. As an unmarried couple your partner will not be automatically entitled to any of your estate if you die intestate or have a say in how your estate is distributed.

A Will is able to be written in contemplation of marriage enabling your future spouse to benefit through your Will and if you were to die within the time frame leading up to the marriage then your spouse will still be entitled to their share. If a Will was made before a lawful marriage or civil partnership and was not written in contemplation of marriage, then it would be automatically revoked. The clause must state that you are to marry a specific person and in a reasonable amount of time, it is not enough to expect to marry in general at some point in the future.

If you do not get married but have an old Will in place that does not provide for your partner, then the only route is to bring a claim against the deceased’s estate which is costly and can cause disagreements between families at an already difficult time.

There are provisions under The Inheritance (Provision for Family and Dependants) Act 1975 where;
• spouses and civil partners of the deceased (as well as former spouses and civil partners) and
• anyone who, for the last two years for the deceased’s life, was living in the same household as them as their husband or wife;
who can challenge the division of the deceased estate if they are to die intestate or their current Will does not provide provisions for them. Spouses and civil partners do not need to show they are in financial need or were financially dependent on the deceased to successfully bring a claim. However, in claims by a spouse or civil partner the court will also have regard to the age of the applicant, the duration of the marriage or civil partnership, and the contribution made by the applicant to the welfare of the family of the deceased.

A Cohabiting couple have no legal status which could cause implications for the surviving partner if one was to die. If they do not own their property jointly then they may be made homeless if the property is distributed according to the rules of intestacy. By owning your property as joint tenants, the portion of the house is automatically left to the surviving partner and is not able to be passed through a Will.

Making a Will as a married couple and leaving your entire estate to one another is advantageous as it will be exempt from inheritance tax. Therefore, the surviving spouse has the ability to leave up to £650,000 free from IHT providing the 1st to die did not use any of their nil rate band.

Without a Will the rules around intestacy are complex and as you do not have control over how your estate is distributed it can make an already stressful and hard period even tougher on the surviving spouse and family members.

What is the effect of Divorce?

Re-writing your Will during divorce or separation is an important decision to make as it is most likely that your ex-spouse is your executor and main beneficiary which you may no longer want.

After divorce if you have not amended it then any gifts to your ex-spouse will lapse and they will be treated as if they died before you and they will no longer be able to be your executor. If they are your main executor of your estate, then you may be left without an executor which can cause significant problems.

Author: Beth Mills
01908 487531 #5